S. N. Wadiyar (Decd. Through L. R.) vs. CWT [2015] 378 ITR 9 (SC)
The appellant was assessed to wealth-tax under the Act for the assessment years 1977-78 to 1986-87. The valuation of the property which was the subject matter of wealth-tax under the Act was the urban land appurtenant to the Bangalore Palace (hereinafter referred to as “the property”). The total extent of the property was 554 acres or 1837365.36 sq. mtrs. It comprised of residential units, non-residential units and land appurtenant thereto, roads and masonry structures along the contour and the vacant land. The vacant land measured 11,66,377.34 sq.mtrs. The aforesaid property was the private property of the late Sri Jaychamarajendra Wodeyar, the former ruler of the princely State of Mysore. He died on 23rd September, 1974. After the death of Sri Jaychamarajendra Wodeyar, his son Sri Srikantadatta Wodeyar, the assessee applied to the Settlement Commission to get the dispute settled with regard to valuation of property and lands appurtenant thereto for the assessment years 1967-68 to 1976-77.
The application of the assessee before the Settlement Commission for the assessment years 1967-68 to 1976- 77 was disposed of on 29th September, 1988 laying down norms for valuation of the property. The Wealthtax Officer adopted the value as per the Settlement Commission for the assessment years 1976-77, 1977- 78 and 1978-79 at Rs.13.18 crore (for both land and buildings). For the assessment year 1979-80, since there was no report of the Valuation Officer, the Commissioner of Income-tax (Appeals) worked out the value of the property at Rs.19.96 crore for the assessment year 1979- 80, which was adopted by the Wealth-tax Officer for the assessment year 1980-81 as well. For the assessment years 1981-82, 1982-83 and 1983-84, the Wealth-tax Officer fixed the value of land and building at Rs.18.78 crore, Rs.29.85 crore and Rs.29.85 crore, respectively. For the assessment year 1984-85, the Wealth-tax Officer took the value at Rs.31.22 crore on the basis of the order passed by the Commissioner (Appeals) for earlier years.
The orders of the Wealth-tax Officer passed under the Act fixing the value of the land for different assessment years for the purpose of the Act was challenged by the assessee before the Commissioner (Appeals). In these appeals, the contention of the assessee was that the value of the property was covered by the Ceiling Act for which maximum compensation that could be received by the assessee was only Rs.2 lakh. The appeals filed for the assessment years, namely, 1980-81, 1982-83 and 1983- 84 were disposed of by the Commissioner of Income-tax (Appeals) by a common order dated 9th January, 1990, in which he made slight modifications to value adopted for the assessment year 1981-82 and confirmed the valuation of the Wealth-tax Officer for the assessment years 1982-83 and 1983-84. However, in respect of appeals relating to the assessment years 1977-78 to 1980-81, the Commissioner (Appeals) passed the orders dated 31st July, 1990, accepting that the urban land appurtenant to the property be valued at Rs.2,00,000. Similar orders came to be passed by the Commissioner of Incometax (Appeals) for the assessment years 1984-85 and 1985-86 also. Against these orders of the Commissioner (Appeals), both the assessee as well as the Revenue/ Department went up in appeals before the Income-tax Appellate Tribunal, Bangalore Bench, Bangalore.
The issue before the Income-tax Appellate Tribunal was only with regard to the valuation of vacant land attached to the property since the assessee had accepted the valuation in regard to residential and non-residential structures within the said property area and appurtenant land thereto.
The Income-tax Appellate Tribunal, Bangalore, passed the order directing the vacant land be valued at Rs.2 lakh for each year from the assessment years 1977-78 to 1985-86. Its reasoning was that the competent authority under the Ceiling Act had passed an order determining that the vacant land was in excess of the ceiling limit, and had ordered that action be taken to acquire the excess land under the Karnataka Town and Country Planning Act, 1901. And under the Land Ceiling Act, an embargo was placed on the assessee to sell the subject land and exercise full rights. The assessee was only eligible to maximum compensation of Rs.2 lakh under the Ceiling Act. Hence, given these facts and circumstances the subject land could only be valued at Rs.2 lakh for wealthtax purposes on the valuation date for the assessment years 1977-78 to 1985-86.
Against the order of the Tribunal, the Commissioner of Wealth-tax sought reference before the Karnataka High Court in respect of the assessment years, namely, 1977-78 to 1985-86 arising out of the consolidated order of the Tribunal.
The High Court, vide the impugned order dated 13th June, 2005 holding that although the prohibition and restriction contained in the Ceiling Act had the effect of decreasing the value of the property, still the value of the land cannot be the maximum compensation that is payable under the provision of the Ceiling Act. Thus, the question referred had been answered against the assessee.
The Supreme Court observed that the valuation of the asset in question has to be in the manner provided u/s. 7 of the Act. Such a valuation has to be on the valuation date which has reference to the last day of the previous year as defined u/s. 3 of the Income-tax Act, if an assessment was to be made under that Act for that year. In other words, it is 31st March, immediately preceding the assessment year. The valuation arrived at as on that date of the asset is the valuation on which wealth-tax is assessable. It is clear from the reading of section 7 of the Act that the Assessing Officers has to keep hypothetical situation in mind, namely, if the asset in question is to be sold in the open market, what price it would fetch. The Assessing Officer has to form an opinion about the estimation of such a price that is likely to be received if the property were to be sold. There is no actual sale and only a hypothetical situation of a sale is to be contemplated by the Assessing Officers. The tax officer has to form an opinion about the estimated price if the asset were to be sold in the assumed market and the estimated price would be the one which an assumed wiling purchaser would pay for it. On these reckoning, the asset has to be valued in the ordinary way.
The Supreme Court noted that the effect of the provisions of the Urban Land (Ceiling and Regulation) Act, 1976 in the context of instant appeals was that the vacant land in excess of the ceiling limit was not acquired by the State Government as notification u/s. 10(1) of the Ceiling Act had not been issued. However, the process had started as the assessee had filed statement in the prescribed form as per the provisions of section 6(1) of the Ceiling Act and the competent authority had also prepared a draft statement u/s. 8 which was duly served upon the assessee. The fact remained that so long as the Act was operative, by virtue of section 3 the assessee was not entitled to hold any vacant land in excess of the ceiling limit. Order was also passed to the effect that the maximum compensation payable was Rs.2 lakh.
The Supreme Court held that the Assessing Officer took into consideration the price which the property would have fetched on the valuation date, i.e., the market price, as if it was not under the rigours of the Ceiling Act. Such estimation of the price which the asset would have fetched if sold in the open market on the valuation date(s), would clearly be wrong even on the analogy/rationale given by the High Court as it accepted that restrictions and prohibitions under the Ceiling Act would have depressing effect on the value of the asset. Therefore, the valuation as done by the Assessing Officer could not have been accepted. The Supreme Court observed that it was not oblivious of those categories of buyers who may buy “disputed properties” by taking risks with the hope that legal proceedings may ultimately be decided in favour of the assessee and in such a eventuality they were going to get much higher value. However, as stated above, hypothetical presumptions of such sales are to be discarded as one has to keep in mind the conduct of a reasonable person and “ordinary way” of the presumptuous sale.
The Supreme Court held that when such a presumed buyer is not going to offer more than Rs.2 lakh, the obvious answer is that the estimated price which such asset would fetch if sold in the open market on the valuation date(s) would not be more than Rs.2 lakh. The Supreme Court having held so pointed out one aspect which was missed by the Commissioner (Appeals) and the Tribunal as well while deciding the case in favour of the assessee. The compensation of Rs.2 lakh was in respect of only the “excess land” which was covered by sections 3 and 4 of the Ceiling Act. The Supreme Court held that the total vacant land for the purpose of the Wealth-tax Act is not only excess land but other part of the land which would have remained with the assessee in any case. Therefore, the valuation of the excess land, which was the subject matter of the Ceiling Act, would be Rs.2 lakh. To that market value of the remaining land would have to be added for the purpose of arriving at the valuation for payment of wealth-tax.
